U.S. dollar slipped to its lowest level seen in over three years as investors grow increasingly worried about the Federal Reserve (Fed) independence amid attacks directed at its chair, and also a report signalling President Donald Trump could pick a replacement early.
Trump on Wednesday called Federal Reserve Chair Jerome Powell "terrible" in his latest attack on the Fed chief and said he has three or four people in mind as contenders for the top Fed job.
The dollar was back at multi-year lows against a basket of other major currencies on Thursday, erasing a brief respite provided by safe-haven flows related to Middle East tensions earlier in the week.
Down 10% so far this year and set for its worst year since 2003, the dollar was expected to weaken further as renewed concern about Fed independence comes amid increased expectations for rate cuts and a looming July 9 deadline for trade agreements.
"We are short the dollar in this environment, where there is an erosion of institutions," said Kaspar Hense, a senior portfolio manager at RBC BlueBay Asset Management. Being 'short' a currency means holding bets it will fall in value.
"This is not currently 100% in the price, and it would still move markets if someone like Hassett or Bessent would get the job in order to cut rates, ignoring fundamental risk," Hense said.
The leading contenders for the next Fed chief reportedly include former Fed Governor Kevin Warsh, National Economic Council head Kevin Hassett, current Fed Governor Christopher Waller, and Treasury Secretary Scott Bessent.
"I think the market is pricing in President Trump appointing someone who, at least at first sight, appears more sympathetic to his cause," said Societe Generale chief FX strategist Kit Juckes.
Comments earlier this week, meanwhile, by Fed policymaker Michelle Bowman, recently tapped by Trump as the Fed's top bank overseer, that the time to cut rates is getting nearer, weakened the dollar as rate-cut expectations rose.
Traders now price in a nearly 25% chance of the Fed cutting rates in July compared to 12.5% last week.
Trump's confrontations with longstanding allies over trade and security, and his attacks on the Fed, have revived questions in Germany around its holdings of central bank gold, some of which is stored at the New York Fed.
And European Central Bank supervisors are asking some of the region's lenders to assess their need for dollars in times of stress, gaming out scenarios in which they cannot rely on tapping the Fed under the Trump administration, Reuters reported last month.
Nick Rees, head of macro research at Monex Europe, said the big short-term risk for markets was that the Fed criticism continued.
"I'll be perfectly honest, I'm currently rewriting them in light of what we are seeing right now," he said, referring to short-term currency forecasts.
"We had thought the dollar should stabilize around current levels because the macro data is about to turn really quite positive."
ING said the euro's break above $1.17 put $1.20 firmly in sight, although sentiment towards the greenback would have to deteriorate further to get there.
Seema Shah, chief global strategist at Principal Asset Management, noted that the dollar had not benefited as much as expected in the past two weeks from heightened Middle East tensions, a sign the dollar's safe-haven role had been hurt.
In recent years, the currency has risen when oil rallies, but it gained just 0.7% last week.
The dollar, the world's No.1 reserve currency, has come under fire this year from erratic U.S. policy making that has exacerbated economic uncertainty and put the notion of U.S. exceptionalism into doubt.
Concern about Fed independence adds to the damage, investors said. Respect for independent institutions such as central banks has long been viewed as a key attraction of major economies, helping anchor economic stability and provide policy certainty.
A survey of 75 central bank reserve managers published earlier this week by think-tank OMFIF showed that 70% of those surveyed said the U.S. political environment discouraged them from investing in the dollar, more than twice the share a year ago.
"Talk about having the next Fed chair announced within the next couple of months, that would be fairly disruptive," said Shah.
"It brings up the whole concern about the credibility and reliability of U.S. institutions again, which is typically something that people don't like."
